DP3017 Do Incentive Contracts Crowd Out Voluntary Cooperation?

Author(s): Ernst Fehr, Simon Gächter
Publication Date: October 2001
Keyword(s): experiments, incentive contracts, incomplete contracts, reciprocity, voluntary cooperation
JEL(s): J41
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3017

In this Paper we provide experimental evidence indicating that incentive contracts may cause a strong crowding out of voluntary cooperation. This crowding-out effect constitutes costs of incentive provision that have been largely neglected by economists. In our experiments the crowding-out effect is so strong that the incentive contracts are less efficient than contracts without any incentives. Principals, nonetheless, prefer the incentive contracts because they allow them to appropriate a much larger share of the (smaller) total surplus and are, hence, more profitable for them.